Two documents, two jobs
A Heads of Agreement (HoA) and a Sale and Purchase Agreement (SPA) are not the same document at different stages of completion. They do different jobs and trying to make one do the other's work is a common source of friction in New Zealand SME sales.
The HoA establishes the commercial bones of the deal quickly, so that both parties commit time and money to the next stage. The SPA documents the deal in legally binding, settlement-ready detail. The art is knowing what belongs in each.
What the Heads of Agreement is for
A good HoA does five things:
- Records the key commercial terms so both parties are working from the same understanding.
- Establishes exclusivity so the vendor stops talking to other buyers while the buyer commits to due diligence costs.
- Sets a process and timeline for due diligence, SPA drafting and settlement.
- Confirms confidentiality obligations beyond the original NDA.
- Records what is binding now and what is conditional on the SPA.
A good HoA is one to three pages. Anything longer is usually trying to do the SPA's job, badly.
What belongs in the HoA
- Parties. Who the buyer is (and whether they are signing personally or via a vehicle yet to be incorporated).
- What is being sold. Shares or assets; if assets, a high-level list with a schedule to follow.
- Price. Headline number and any agreed adjustment mechanism in principle (working capital peg approach, hold-back concept).
- Payment. Cash at settlement; any vendor finance or earn-out in principle.
- Conditions in principle. Subject to satisfactory DD, SPA, finance, OIO if relevant, key contract assignments, landlord consent.
- Exclusivity. Period (typically 30 to 90 days), no-shop obligations.
- Confidentiality. Reaffirmed.
- Process and timeline. When the SPA is to be drafted, by whom, target settlement.
- What's binding now. Usually: confidentiality, exclusivity, costs. Usually not: the price, conditions, warranties.
What does NOT belong in the HoA
These belong in the SPA, where they can be properly drafted and negotiated:
- Detailed warranties and indemnities.
- Specific working capital calculation policies.
- Restraint of trade scope and duration.
- Detailed earn-out mechanics.
- Tax allocation across asset categories.
- Disclosure schedule.
- Risk and insurance allocation through to settlement.
A HoA that tries to cover all this becomes a fight in itself, delays DD, and burns the goodwill you need for the harder negotiation later.
The "subject to" question — and why it matters
The biggest single source of HoA disputes in NZ is whether the document is binding or not. The convention is that the commercial terms are non-binding (a statement of intent), while certain operational provisions — exclusivity, confidentiality, costs — are binding.
If you want the HoA to be non-binding overall, the document should say so clearly, in plain English, on the first page. Words like "subject to contract" and "non-binding except where stated" are not magic phrases — courts look at the substance — but they help.
If a buyer is pushing for a binding HoA before DD, ask why. A buyer who needs to bind the vendor before they have done their work is signalling that they aren't sure they want to do the work; that is a yellow flag.
Exclusivity: how long is fair
Exclusivity is the buyer's reward for committing to DD costs. The fair length depends on the complexity of the business:
- Simple owner-operated SME: 30 to 45 days.
- Established business with staff, leases and contracts: 45 to 60 days.
- Larger or more complex business, or one involving OIO consent: 60 to 90 days, sometimes longer.
Vendors should resist open-ended exclusivity. A clear date by which a binding SPA must be signed (or exclusivity falls away) keeps everyone honest.
Break fees and deposits
Some HoAs include a break fee — money paid by one party to the other if the deal fails for reasons attributable to that party. Common variants:
- A buyer deposit held in the vendor's solicitor's trust account, forfeited if the buyer walks for unreasonable reasons.
- A vendor break fee payable if the vendor accepts a competing offer in breach of exclusivity.
These should be modest, proportionate to the costs being incurred, and very clearly drafted. A break fee that punishes ordinary commercial caution is unenforceable and corrosive to the relationship.
From HoA to SPA: a workable timeline
For a typical NZ SME sale, once the HoA is signed:
- Days 1 to 30: Buyer's DD. Vendor populates the data room, hosts site visits, answers questions in writing. Vendor's lawyer starts drafting the SPA in parallel.
- Days 30 to 45: SPA negotiation. Working capital approach, warranties, indemnities, restraints, conditions finalised.
- Days 45 to 60: Conditions satisfied (finance, landlord consent, OIO if relevant). Final pre-settlement adjustments calculated.
- Settlement day: Funds flow, ownership transfers, keys handover. Day-after-settlement handover begins.
This is a hard cadence. Slippage is normal but needs to be visible and managed, with a status check between the principals (not just the lawyers) every couple of weeks.
What this means for you
If you are negotiating an HoA:
- Keep it short and commercial. Save the lawyering for the SPA.
- Be explicit about what is binding and what is not.
- Negotiate exclusivity tightly, with a clear backstop.
- Get your SPA drafting in parallel with DD, not after.
A good HoA is a strong handshake in writing. A bad one is an SPA negotiation conducted twice.
General information only — every HoA has to fit the deal; have your lawyer review before signing, even if the document looks "non-binding".